2022 (4) TMI 982 - AT - Insolvency and Bankruptcy

Tribunal Overturns Rejection of Insolvency Application under IBC 2016

The Tribunal set aside the Adjudicating Authority's rejection of the Section 9 Application under the Insolvency and Bankruptcy Code, 2016. It held that ... Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - Operational Creditors - Existence of debt and dispute or not - proper reply to demand notice, received or not - when Reply submitted by Corporate Debtor was not within 10 days from the receipt of the notice under Section 8, whether the Corporate Debtor is precluded to raise the issue of Pre-Existing Dispute before the Adjudicating Authority? - HELD THAT:- Looking into the scheme of Section 9(5)(ii) which provides that the Adjudicating Authority can reject the Application if-“notice of dispute has been received by the Operational Creditor or there is a record of dispute in the information utility”. The above provision indicates that even if no notice of dispute has been received, and there is record of dispute in the Information Utility the Application under Section 9 is to be rejected by the Adjudicating Authority. The above provision clearly indicates that even in absence of notice of dispute, Adjudicating Authority can reject the Application if there is record of dispute in the Information Utility. It goes without saying that record of dispute in the Information Utility can very well be pointed out by the Corporate Debtor before the Adjudicating Authority when notice is issued under Section 9. Further in Reply to Section 9 Corporate Debtor can bring the material to indicate that there are pre-existing disputes in existence prior to issuance of demand notice under Section 8. Thus, mere fact that Reply to notice under Section 8 (1) having not been given within 10 days or no reply to demand notice having been filed by the Corporate Debtor does not preclude the Corporate Debtor to bring relevant materials before the Adjudicating Authority to establish that there are pre-existing dispute which may lead to the rejection of Section 9 application. The matter is remanded back to the Adjudicating Authority to consider the Application afresh - appeal allowed by way of remand. Issues:- Rejection of Section 9 Application by Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016.- Interpretation of 'Operational Debt' and default of instalment of settlement agreement.- Compliance with Section 8 and Section 9 provisions regarding notice of dispute and application filing.Analysis:Issue 1: Rejection of Section 9 ApplicationThe Appellant filed an appeal against the Adjudicating Authority's rejection of the Section 9 Application under the Insolvency and Bankruptcy Code, 2016. The rejection was based on the grounds that no operational debt was proved by the Appellant. The Adjudicating Authority held that the default of an instalment of a settlement agreement does not fall within the definition of Operational Debt. However, the Appellant argued that the agreements in question entitled them to receive payments, and thus, the rejection was erroneous. The Tribunal found that the rejection was based on an incorrect premise, as the agreements were not settlement agreements but rather established rights and obligations between the parties. Therefore, the rejection was set aside, and the matter was remitted back to the Adjudicating Authority for fresh consideration.Issue 2: Interpretation of 'Operational Debt'The Adjudicating Authority's interpretation of 'Operational Debt' in the context of default of an instalment of a settlement agreement was challenged. The Appellant contended that the agreements in question gave them the right to receive payments, and thus, the default did not fall under the category of a settlement agreement. The Tribunal agreed with the Appellant's argument, emphasizing that the agreements established rights and obligations rather than settlement terms. Therefore, the Adjudicating Authority's interpretation was deemed incorrect, leading to the setting aside of the rejection.Issue 3: Compliance with Section 8 and Section 9 ProvisionsThe Tribunal examined the compliance with Section 8 and Section 9 provisions regarding the notice of dispute and application filing. It was noted that the Corporate Debtor had replied to the Demand Notice within the stipulated time frame, disputing the claims made by the Appellant. Despite the Adjudicating Authority's focus on the timing of the reply, it was established that the Corporate Debtor had raised disputes both in response to the Demand Notice and in the detailed reply to the Section 9 Application. The Tribunal clarified that the Corporate Debtor's failure to reply within the specified time did not preclude them from raising pre-existing disputes. The Tribunal referred to a previous judgment to support this stance, emphasizing that the mere failure to reply to a demand notice does not extinguish the rights of the Operational Creditor to show the existence of a pre-existing dispute. Consequently, the Tribunal set aside the rejection and directed the Adjudicating Authority to reconsider the Application in light of the parties' submissions and after hearing both sides.